Q: Can you provide an overview of the team and how you cover asset managers, including the evaluation frameworks you use?

A: We have 10 individuals including myself on our investment team. I have divided my team into three groups based on the primary investment needs of our advisors. One team is focused on market strategy, the second team is focused on asset allocation and portfolio strategy, and the third team is focused on manager research. In addition to this structure, we also have a service component (to answer advisor questions) and a social media perspective (television, Twitter, etc.). The manager research team comprises four of the individuals under the leadership of Hristo Stefanov. Hristo oversees the strategic direction of that team. Under him, one analyst focuses on domestic equity funds, one on non-U.S. funds and alternative investments, and the last focuses on fixed income funds.

Our manager selection and monitoring process operates on a shared philosophy that diligent fundamental research, a clear and repeatable analytical process, and the identification of opportune entry and exit points within a mutual fund are key to identifying, recommending and monitoring investment opportunities that are positioned to deliver superior long-term, risk-adjusted returns.

We regularly review the complete manager universe and carefully select a core group of professional money managers who we believe represent the best the industry has to offer. With the explosive growth of discretionary account management over the past few years, we have seen an increased need for a professional, research-driven manager selection process. Our experienced analysts seek to identify the most attractive money managers for each major asset class.

For each investment category, in-depth, comprehensive analysis forms the basis of our approach. We use a three-step process, including quantitative analysis, qualitative review, and an evaluation of timing and context to construct a recommended list of money managers. Our recommended list is built using sophisticated and comprehensive databases, in-depth manager questionnaires, face-to-face meetings and conference calls.

Q: What are some of the opportunities and challenges for the research team when it comes to product recommendations, managing discretionary portfolios and supporting Cetera?

A: We service all types of advisors – from portfolio manager “do-it-yourselfers” to fully discretionary “complete outsourcers.” Because our nearly 8,000 advisors are so diverse, we try to build usable and scalable resources that can be used to some degree by all our advisors. The opportunities are important. The team has always focused on producing as much research as possible (I estimate that we have over 700 touchpoints with each of our advisors). Today, however, we realize that advisors are busy and just need the basic facts. So, with that in mind, our team is transitioning our research to make it more user friendly – videos, tweets, short commentaries, etc. We are also focused on increasing our media content so that the end client can see our investment perspectives. The challenges are primarily around scale. With 8,000 advisors, we cannot produce research exactly for each advisor. Instead, we need scalable research that helps to anticipate a client’s question before they ask the advisor. 

Specifically for manager research, the biggest challenge is the changing environment. As you know, asset managers are being squeezed from both a revenue standpoint (active versus passive, lower capital market assumptions) and an expense standpoint (rising legal costs, the costs of attracting and retaining talent, etc.). All of this is causing fund companies to merge or change investment personnel and creating a lot of volatility in recommendations. Staying on top of these ongoing personnel changes is a major challenge.

Q: Do you see a place for alternatives in retail? What are your thoughts on interval funds?

A: Yes, I view liquid alternatives as an important component of a portfolio and we have a list that we incorporate into our tactical discretionary portfolios. It’s a way to potentially reduce sharp fluctuations. Think about this – the S&P 500 has been positive in 29 of the last 39 calendar years. But in those years, the average intra-year drop is 13.9%. Alternatives may be able to help reduce this through diversification. 

Interval funds are interesting, but I worry about the limited redemptions.

Q: Cetera Financial Group launched its SetIncome retirement income tool last month. Can you tell us why you think it will be successful?

A: In my opinion, it will be a successful program. Think about this – we are incorporating multiple types of investment vehicles in an effort to generate a retirement income stream that seeks to provide a higher probability of lasting a client’s entire retirement. That’s amazing. Plus, as a foundation, we are leveraging a team of experienced investment professionals from the Allianz family who have done this in Europe for such a long time (RiskLabs).

Q: Any thoughts on active versus passive investing, or where to favor one over the other?

A: Active and passive come in cycles (just like high quality versus low quality or domestic versus international outperformance). I believe we are in an extended period of passive outperformance. But also as a big believer in mean reversion, like any cycle, it will change (and we have started to see such changes this year). Active has struggled for a variety of reasons but primarily due to a bull market and macroeconomic environment that has pushed all investments higher (and limited the effectiveness of bottom-up stock-picking).

Going forward, I expect active to outperform when international outperforms domestic and when small-cap outperforms large-cap. In the past, these scenarios tend to be positive for active equity managers.

On the fixed income side, I worry about passive investing. Relative to active, the higher duration and lower credit quality may hurt investors when yields rise. Active managers can generally sidestep these issues.

Q: Can you point to what keeps you up at night?

A: Many things worry me.

On the markets, I worry that valuations have priced in perfection (trade war resolution and dovish Fed).  However, we are starting to see cracks around the trade war and global economic growth has slowed so fast. A few other concerns include: Germany could have a recession with one more quarter of negative GDP, domestic earnings are declining year-over-year (is an earnings recession coming?), $16 trillion of negative-yielding global debt, national debt relative to GDP is approaching WWII levels, the stronger dollar and the effect on S&P 500 revenues, is the Fed using all of its dry powder now, what happens if the U.S. goes into a recession, and when will the trade war be resolved.

From a mutual fund standpoint, I worry about the surge in the number of retiring portfolio managers and analysts in the industry. This is creating a list of portfolio managers with less experience and, given that this bull market started in 2009, many have not experienced a market decline. How will they react when we eventually have a short market pullback?